Power rules require cautious approach

Investment in Australia’s electricity network over the next five years is similar to that planned for the higher profile national broadband network, but getting it right is arguably more important to an everyday activity that no business or household can avoid.

Rising electricity prices might be more controversial than the NBN, however the underlying economics of the electricity distribution network are just as complex but tend to get less ­attention.

Now, the Australian Energy Regulator has opened a window on the cost of the distribution network which is due for a $42 billion upgrade over five years in one of the country’s largest infrastructure projects.

The AER proposals for new controls over investment in this regulated industry are important changes which could limit electricity price rises but could also create power shortages if there is insufficient investment.

They follow allegations by the federal government’s climate change adviser,
Ross Garnaut
, that the current system has incentives for over-investment and higher electricity prices which are passed on to consumers with no avenue of redress.

It is generally agreed that higher network costs have been responsible for about 70 per cent of electricity price rises over the past year, contrary to claims that the prices have been due to various climate regulation policies – although those policies are likely to have a growing impact in future. Australian power prices have also risen more than some comparable countries in recent years due to network investment.

Electricity network companies reject suggestions they have “gold-plated" their networks and warn that the proposed tighter rules on reasonable expenditure will limit their capacity to respond to demand peaks from, for example, the growing use of air-conditioning.

These proposals can be a contribution to restraining electricity price rises. But they need to be accompanied by effective incentives for reduced power use, better information about where the real costs of solar panel connections fall in the system and workable time-of-use pricing. We also need to resolve whether state governments that have failed to privatise power networks are taking advantage of cheaper capital to rip excessive dividends from their power assets.